Life is Negotiable

How well do you negotiate?

One of the great lessons in life which is rarely taught in school is that life is negotiable. What this means is that you have the power to shape your life. Few people know this. There are lots of people who do not choose their own path and live life passively accepting whatever (often frustrating) circumstances arise.

The art of negotiating is equally important in business. The purpose of this Whitwell Report is not to instruct you in the art of 'how' but to inform you that you can and encourage you to more actively negotiate. Let's start by asking ourselves, what is "negotiation?"

Whitwell Rule #1: Negotiation is the wisdom of knowing what you want and the courage to ask for it. Negotiation, if done well, is a positive activity that rewards the proactive and penalizes the passive. Done well, it also earns you more respect from the person with whom you are negotiating. Remember: it is worth your while to negotiate.

Whitwell Rule #2: most things in life are negotiable, no matter what people tell you and even if the printed materials suggest otherwise. For example, many of the services provided by banks and financial institutions are negotiable but this is a fact that most firms will never publicly admit. A funny quote that comes to mind involves a retort to the oft-repeated statement that money cannot buy you love. "But it can certainly improve your bargaining position!" Here is a list of things which are price-negotiable. How many of these things have you negotiated before?

* Bank fees
* The interest rates banks charge on debt
* The interest banks pay you on your savings accounts
* Insurance fees (premiums)
* Security brokerage commissions
* Real estate brokerage commissions
* Car prices
* House prices
* Salary and bonus
* Real estate taxes
* Hotel room rates
* Furniture prices in stores
* Fine jewelry in high-end stores
* Legal fees
* Accounting fees

Whitwell Rule #3: negotiation creates many additional non-financial benefits. For example, a major benefit of negotiation is the educational process is creates. You will learn a lot more about the businessmen you are dealing with and the economic reality of products or services if you negotiate. In addition, the daily practice of negotiation will increase your self-esteem and stimulate your creativity, by training yourself to think through situations without the usual constraints of what most people think is possible and impossible. Successful negotiation also increases your attentiveness to the needs of other people since the surest way to reach agreement with others is to meet their needs.

Whitwell Rule #4: your choice of attitude and choice of language makes a big difference in the outcome of your negotiation. If you think "there is no way they will agree" then you will probably be right. If you believe "they will accept" they probably will. Your state of mind is crucial. Your language is equally powerful. For example, if you ask "can you lower this price?" they will often say "no" but if instead you ask "how much will you lower the price?" people will almost always respond with a price reduction in your favor. It can be quite fun -- give it a try.

Let me give you some real examples that I have been involved in the last two years:

1. Last year I gave notice to vacate an apartment that I had been renting in Tokyo. One of the customs in Tokyo is to charge obscene fees to tenants when they leave under the guise of cleaning charges. I do not like this tradition so I negotiated. I arranged to have my apartment cleaned and then told my broker that I would only pay for specific damages (such as the remote which I had lost) and that I would not pay for a duplicative cleaning fee, since I had just cleaned the apartment. In Japan, brokers tend to represent the landlord (who provides them future business). Nevertheless, I did not want to pay $3,000 just for the sake of tradition. Predictably, the broker came back and told me my request would likely be rejected. In return I told him that I confidently expect that the owner would honor my request and made it clear that I was unwilling to consider anything to the contrary. Several times the broker came back and asked me to reconsider. Each time I made my case. Months passed. I withheld the last months rent until this was resolved. Last week I got an email from the broker with the news that the owner was only going to charge me $500 instead of the 'traditional' $3,000. The point is that no one was looking out for me in the system and that by negotiating, I got a better deal.

2. This example relates to a moving company with whom I had a dispute (moving things from Tokyo to the United States). Despite a fixed price contract, the moving company tried to bill me an additional $2,000. I did not agree with their reasoning (since it was a fixed price contract) and I insisted on asserting my rights. After many emails back and forth, they came back with a compromise offer of only $1,000. Although this was movement in the right direct, I continued to negotiate and eventually reduced the additional payment to only $500. In this situation, despite the fact that the contract was on my side, the reality is that legal action would have cost me more time and money than I was willing to invest and importantly, they had significant leverage over me since they had in their possession and control a lot of items that I valued and did not want to lose. I persevered and succeeded in negotiating a significantly improved result from the one that we were facing at first. The point of this story is that even when you feel that your position is unfavorable, because the other side has some type of leverage they can use against you, stay calm and remain focused on your goal.

3. Another example relates to my company, Tierra Capital which runs a real estate investment fund that focuses on buying assets at a cheap price, improving the assets and then selling them for a big profit. We are in the midst of negotiating a deal on a 70,000 square foot building in a major city in Texas. A bank currently owns the debt on this property which went through bankruptcy several years earlier. We are negotiating with the bank. When we first found out about this deal, the bank was selling the building for $2.5mm, even though six years ago the previous tenant/owner had spent over $6.0mm improving the property. When we inquired about the price, we were told by the selling broker that there was no way that the bank would consider an offer below $2.5mm. We told the broker that we were not interested (since we think that the price is still high based on current rents in the area). Despite what the broker told us, we put in a bid of $1mm, and we have been told that there are two other bids for $1.5mm that the bank is seriously considering. In this case we probably will not win the bid, but the point is that sometimes it is worth focusing on what you think makes sense in negotiations, instead of what people tell you is or is not possible.

4. My last example is particularly telling. As mentioned above, I run a real estate fund. Several months ago we deposited millions of dollars into our bank account, with a famous brand-name bank. Would it shock you to learn that the bankers were happy letting it sit in a non-interest bearing account? I was livid that I had to proactively ask for the best service and that if I had failed to ask, I would have gotten bad service (low interest). I called my banker and specifically asked for the best money market rate they could give me that still provided me instant access to the funds (they will tend to offer higher rates if you commit to time-deposits). I find it absurd that you have to specifically request the best rates (as if anyone would ask for mediocre rates) but as my example proves, if you do not ask you do not receive. After requesting their best rates, they increased my annual yield to 0.95% from 0.00%. At the same time, I asked one of our summer interns to see if there were better deals being offered by other major banks. Indeed he found a bank that was offering rates of 1.75%. I was incredulous. So I again called up my banker and told him he had to further improve my rate and do so in a hurry despite the fact that I was getting what he claimed was the "best rate" they can offer. Long story short, within 48 hours, he had arranged for me to get 1.65% (a dramatic improvement). If you think it is the bank, think again -- most banks operate like this. If you think it was my banker, think again -- most service providers (with few exceptions) operate like this. The onus is on you to stick up for your needs and ask for better service. It is mind-blowing that one needs to do this sometimes, but asking is much better than not asking.

On a different subject, I think this is one reason the Japanese are going to face some economic challenges in the next decade. The Chinese are master-negotiators. They negotiate every second of the day without stop. Most Japanese, by contrast, have never negotiated anything significant in their life. As a consequence, the Japanese do not understand negotiation-based investment strategies, such as corporate and real estate private equity, and instead they put most of their money in interest accounts bearing little to no interest. This passive strategy is risky.

Most often, value comes from work (as opposed to passive strategies). Negotiation is one of the tools you can use to create value in business and in your personal life. Like any tool, there are times to negotiate and times not to negotiate, but the overall message is make sure that negotiation is one of the tools in your tool box. People who are proactive and focused on desired outcomes will outperform those that are totally passive ? not just in investing but in many areas of life.

Make It Happen!

Stefan